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Income Taxes
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The Company’s geographical breakdown of income before income taxes is as follows:
Year Ended December 31,
202320222021
(in thousands)
Domestic$164,958 $122,013 $80,472 
Foreign13,693 11,687 8,925 
Income before income taxes$178,651 $133,700 $89,397 
Income tax provision consists of the following:
Year Ended December 31,
202320222021
(in thousands)
Current
Federal$32,405 $35,286 $20,135 
State6,061 6,269 4,324 
Foreign5,218 4,606 3,701 
Current income tax provision43,684 46,161 28,160 
Deferred   
Federal(13,584)(17,097)(7,342)
State(2,009)(3,055)(1,722)
Foreign(1,035)(301)(659)
Deferred income tax benefit(16,628)(20,453)(9,723)
Income tax provision$27,056 $25,708 $18,437 
The reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
Year Ended December 31,
202320222021
Federal statutory rate21.0 %21.0 %21.0 %
State taxes2.6 2.3 3.1 
Stock-based compensation2.7 3.4 10.3 
Excess tax benefits related to stock-based compensation(2.9)(5.2)(5.4)
Foreign source income0.3 3.8 0.4 
Change in valuation allowance0.1 0.3 0.2 
Foreign-derived intangible income deduction(4.4)(4.9)(7.0)
Federal and state research and development credit(1.4)(1.3)(1.9)
Accrual to return adjustments and Other(2.9)(0.2)(0.1)
Income tax provision15.1 %19.2 %20.6 %
Deferred Income Taxes
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the Company’s deferred tax assets and liabilities are as follows:
December 31,
20232022
(in thousands)
Deferred tax assets
Research and development credit carryforwards$11,502 $10,957 
Fixed assets581 — 
Accrued liabilities3,020 3,677 
Deferred revenues3,381 5,766 
Operating lease liabilities7,722 10,667 
Intangible assets3,549 3,465 
Stock-based compensation4,263 4,691 
Capitalized research and development47,793 30,234 
Other2,999 2,195 
Gross deferred tax assets84,810 71,652 
Valuation allowance(12,375)(12,476)
Total deferred tax assets72,435 59,176 
Deferred tax liabilities  
Fixed assets— (1,745)
Operating leases - right of use asset(5,999)(8,359)
Deferred commissions(3,675)(3,660)
Total deferred tax liabilities(9,674)(13,764)
Net deferred tax assets$62,761 $45,412 
The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. The Company regularly assesses the ability to realize its deferred tax assets and establishes a valuation allowance if it is more-likely than-not that some portion, or all, of the deferred tax assets will not be realized. The Company weighs all available positive and negative evidence, including its earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Due to the weight of objectively verifiable negative evidence, it is more-likely-than-not that its California deferred tax assets will not be realized as of December 31, 2023. Additionally, due to a lack of sufficient future income of the appropriate character, certain U.S. federal and state deferred tax assets are not more-likely-than-not to be realized. Accordingly, the Company has recorded a valuation allowance of $12.4 million and $12.5 million against such deferred tax assets as of December 31, 2023 and 2022, respectively. The decrease in valuation allowance was mainly associated with the California research and development credit generated during the year ended December 31, 2023 offset by a decrease in unrealized loss on available for sale securities that will not likely be realized in the foreseeable future.
As of December 31, 2023 and 2022, the Company had $17.0 million and $16.2 million, respectively, of California research and development credit carryforwards. California research and development credits are carried forward indefinitely. As of December 31, 2023 and 2022, the Company had foreign tax credit carryforwards of $1.0 million and $0.9 million, respectively, which begin to expire in 2028.
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
Year Ended December 31,
202320222021
(in thousands)
Unrecognized tax benefits beginning balance$10,542 $9,676 $8,855 
Gross increase for tax positions of prior years262 89 — 
Gross decrease for tax positions of prior years— — (25)
Gross increase for tax positions of current year1,127 777 846 
Lapse of statute of limitations(33)— — 
Total unrecognized tax benefits$11,898 $10,542 $9,676 
The unrecognized tax benefits, if recognized, would impact the income tax provision by $6.1 million, $5.3 million and $4.9 million as of December 31, 2023, 2022 and 2021, respectively. The remaining amount would result in the recognition of a corresponding deferred tax asset that is then offset by a full valuation allowance. As of December 31, 2023, the Company does not believe that its estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months. The Company has elected to include interest and penalties as a component of income tax expense. The amounts were not material for the years ended December 31, 2023, 2022 and 2021.
The Company files income tax returns in the United States, including various state jurisdictions. The Company’s subsidiaries file tax returns in India and various other foreign jurisdictions. The tax years 2001 through 2023 remain open to examination by the major taxing jurisdictions in which the Company is subject to tax. The Company is also currently subject to tax audits in various jurisdictions. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner inconsistent with its expectations, the Company could be required to adjust its income tax provision in the period such resolution occurs.
As of December 31, 2023, the Company has undistributed earnings in certain foreign subsidiaries that the Company has indefinitely reinvested outside the United States. Due to U.S. tax rules related to taxation of foreign earnings, the unrecorded deferred tax liability is immaterial. The Company may be required to pay additional foreign withholding taxes if the Company repatriates those earnings in the future.